Trimble Beats, Stays Neutral - Analyst Blog

Trimble Navigation's (TRMB) third quarter earnings exceeded the Zacks Consensus Estimate by 8 cents, or 26.7%. Both GAAP and non-GAAP earnings exceeded management's expectations.

Seasonality typically causes huge sequential fluctuations in both revenue and margins. As a result, management generally compares results on a year-over-year basis. We have included sequential comparisons, where required.

Revenue

Trimble's third quarter revenue of $318.2 million was down 4.5% sequentially and up 18.0% year over year, exceeding the high end of the guided range of $303−$308 million (down 7.6% to 9.1% sequentially) and coming in 3.3% ahead of the Zacks Consensus.

While continued weakness in U.S. commercial and residential construction has impacted Trimble's business, other areas have started to pick up. Trimble has also made a number of acquisitions in recent months, which are helping to build the product portfolio and better position the company in markets with better growth prospects.

Revenue by Segment

E&C unit revenue of $189.6 million was up 0.6% sequentially and 26.9% year over year. E&C usually witnesses strength in the first two quarters of the year and declines in the next two. Therefore, the last quarter's performance may be considered encouraging. The most important markets within E&C are heavy and highway, large-scale commercial, smaller-scale commercial and housing in that order.

Trimble stated that segment revenues were currently being driven by survey and heavy and highway equipment. The heavy and highway business in particular witnessed strength in both the domestic market and internationally. Commercial is improving very gradually and residential is likely to remain lumpy in the near term. The uncertainties in North America and Europe continued in the last quarter, although E&C business in other regions was strong.

TFS revenue of $67.2 million was down 16.1% sequentially and up 20.8% from the first quarter of 2009. The segment, which is largely driven by the agricultural market, is particularly weak in the second and third quarters, with revenue stabilizing in December and jumping up in March. Therefore, the sequential decline was on account of normal seasonality.

The strength with respect to the year-ago quarter came from both geographic information systems (“GIS”) and stronger agricultural revenue. Trimble stated that improved market conditions and a better product portfolio combined to drive agricultural revenue.

TMS revenue of $37.7 million was down 1.3% sequentially and 4.8% from the comparable quarter of 2009. The segment's results were helped by Trimble's acquisition of Punch Telematix, the gains from which were however not enough to offset the loss of revenue from a key customer that decided to build in-house capabilities in the second quarter.

Additionally, the continued softness in the commercial market, which increased churn rates and prompted some fleet owners to cut the size of their fleets, also impacted results in the last quarter. Although small and medium customers have started showing interest, it is unlikely that there will be any major improvement in the near term.

The AD segment generated 7% of revenue, down 10.9% sequentially and up 5.7% from the last year. The segment has not been performing too well in the recent past due to weaker sales of embedded products. Growing international exposure and new deal wins are positives however.

Revenue by Region

North America remains the largest segment for Trimble, with a 52% revenue share. The market was down 6.3% sequentially and up 7.6% from the year-ago quarter. The sequential decline and year-over-year increase may both be attributed to gradual recovery in the market, following the recession. Stimulus-driven revenue on the other hand was negligible, and Trimble expects the positive impact of the stimulus to continue over the next 6−9 months.

Europe strengthened a great deal, with a 23% revenue share. Sequential and year-over-year increases in the region were 4.5% and 29.2%, respectively. Other than the fact that the European economy is also on the road to recovery, Trimble's business was helped by a number of acquisitions.

Asia-Pacific accounted for 17% of Trimble's revenue in the last quarter, declining 9.8% sequentially and growing 25.4% year over year, due to the success of targeted programs in China and India, as well as geographic expansion over the last few months.

The rest of the world contributed 8% of revenue, down 4.5% sequentially, but up 57.3% year over year.

Margins

The pro forma gross margin for the quarter was 52.2%, up 321 basis points (bps) sequentially and 93 bps year over year. The sequential increase was helped by a higher mix of survey business, which typically carries higher gross margins. Acquisitions are also having a positive impact on the gross margin, something which should continue in the next few quarters.

Trimble reported operating expenses of $119.2 million that were up 4.2% sequentially and 15.8% from the year-ago quarter. The operating margin was 14.8%, flattish sequentially and up 163 bps year over year.

Management's restructuring actions have significantly lowered the cost base, which helped the positive comparisons from the year-ago quarter. Sequential comparisons were impacted by acquisitions. Specifically, COGS as a percentage of revenue was down 321 bps sequentially, offset by increases in S&M by 157 bps, G&A by 113 bps and R&D by 45 bps.

The GAAP operating margins by unit were E&C 19.3% (up 130 bps sequentially), TFS 31.3% (down 613 bps), TMS -0.2% (down 107 bps) and the AD segment 17.2% (down 229 bps). On a year-over-year basis, the E&C margin expanded 515 bps and TFS margin expanded 201 bps, while both TMS and AD were down.

The improvement in the E&C margin is attributable to operating leverage from higher revenue. Volumes and mix were the main reason for changes in the TFS margin. Mobile solutions margin was impacted by product mix and weaker sales.

Net Income

The pro forma net income was $43.1 million, or a 13.6% net income margin compared to $15.3 million, or 4.6% in the previous quarter and $26.3 million, or a 9.8% net income margin in the prior-year quarter. The pro forma calculations in the last quarter exclude inventory adjustments, restructuring charges, acquisition-related costs and amortization of intangibles on a  tax-adjusted basis. Our pro forma estimate may not match management's presentation due to the inclusion/exclusion of some items that were not considered by management.

On a fully diluted GAAP basis, the company recorded a net profit (for Trimble shareholders) of $32.8 million (27 cents per share) compared to $6.8 million (5 cents per share) in the previous quarter and a net profit of $15.6 million (13 cents per share) in the prior-year quarter.

Balance Sheet

Inventories were up 11.1% to $150.7 million, with annualized inventory turns going down from around 4.3x to around 3.4x. Days sales outstanding (DSOs) went up from around 60 to around 66.

Trimble used $8.3 million of cash in operations and spent $57.2 million on acquisitions, $5.3 million on capex, $6.1 million on share repurchases and $49.7 million on a settlement with the IRS. As a result, the cash position declined $50.6 million during the quarter to $211.1 million. The net cash position at quarter-end was $59.9 million.

Guidance

Management expects fourth quarter revenue of $313−$318 million (flat to down 1.6% sequentially, up 13%−15% year over year). The mid point of the guidance range is expected to bring GAAP earnings of 18−20 cents per share and non-GAAP earnings of 33−35 cents per share.

The one-time charges excluded for the calculation of non-GAAP EPS are amortization of intangibles (approximately $14.6 million), the impact of stock based compensation ($6.5 million) and acquisition-related costs ($1.6 million). Both GAAP and non-GAAP EPS use a tax rate of 18%−20% and a share count of 124.2 million.

In Summary

Trimble's business appears to be turning around and management initiatives, such as lowering of cost structure, strategic acquisitions, product enhancements and international expansion appear to be paying off. The softness in certain areas of the business is related to macro concerns stemming from the recession and we are optimistic about improvements in 2011. 

Trimble shares carry a Zacks #3 Rank, implying a short-term "Hold" recommendation. Since recovery in the business will be gradual and near-term catalysts are absent in our opinion, our longer-term recommendation is also "Neutral".

 
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